Eliminating 100 million tax returns

On March 28, the U.S. Justice Department sought to close a nationwide chain of income tax preparation shops it accuses of fraud. The action underscores the potential for abusive business practices that taxpayers face because Congress has failed to embrace technology that would eliminate most tax returns.

The Justice Department wants a federal judge to shut down Instant Tax Service, whose sole owner is Fesum Ogbazion of Dayton, Ohio, saying he is responsible for “extensive and pervasive tax fraud.” It also sued four of his 276 franchisees. The company has not responded to the lawsuit.

Congress could easily eliminate fraud by abusive tax preparers, as is alleged in the Ogbazion case, and save taxpayers billions of dollars annually, by simply ending mandatory filing of tax returns for most taxpayers.

About 100 million taxpayers — those whose income is entirely from wages and retirement funds, and who do not itemize deductions — should not have to file returns. The government already has the information it needs to calculate the taxes these people owe, once they supply their marital status and number of dependents. It would not take much to automate their income tax payments, as many other modern countries do.

I put the chances of Congress taking such a sensible course at one in 84,000. That’s about the same as the odds of being indicted for a tax crime in 2011, based on an analysis of official data by Syracuse University’s Transactional Records Access Clearinghouse.

Congress will not act because individual income tax returns, which for most people are make-work that creates a drag on the economy, provide tidy revenues for Intuit, the maker of TurboTax software, H&R Block and other legitimate corporations that profit from preparing tax returns. These companies have considerable resources at their disposal to spend on lobbying politicians to keep the tax filing requirement. One sign of their determination: Intuit in 2006 donated $1 million in support of an unsuccessful candidate for California state controller who opposed optional state-prepared returns in California. Intuit has said there are serious problems with the program, which remains in operation, but in my view none of Intuit’s criticisms stands up to scrutiny.

A SIMPLER TAX CODE

Intuit, H&R Block and other tax firms say that they help people pay the least tax and avoid costly mistakes. But these concerns would be easily addressed by simplifying the tax code. In my view, any business that depends on government-induced inefficiency should be swept into the dustbin of history.

Another reason reform is unlikely is that politicians have learned from Republican pollster Frank Luntz over the years that riling up voters against the Internal Revenue Service attracts votes and campaign donations. Actually fixing the problem by ending tax filing for the vast majority would require politicians to come up with other ways to get donors to open their checkbooks. Republican politicians who follow Luntz’s advice seem not to realize they are attacking law enforcement, a strategy that would offend many of their donors if applied to the FBI or street cops.

Short of ending tax filing for most Americans, Congress could license tax preparers — instead of only requiring that they identify themselves with a unique number. We don’t trust amateurs to inspect elevators or audit charities, so why do we let just anyone charge for preparing tax returns? This is especially true given that U.S. Taxpayer Advocate Nina E. Olson has thoroughly documented false and fraudulent reporting by tax preparers who are exempt from IRS professional conduct rules because they are not accountants, enrolled agents or lawyers.

The case of Instant Tax Service appears to be particularly egregious. The Justice Department alleges that the company charges its customers, who are mostly poor and unsophisticated, as much as $1,000 for 15 minutes of tax preparation. It “encourages its franchisees to lie to the IRS about anything,” the department said in court papers.

The government’s complaint quoted Ogbazion, the company’s owner, as saying that “every tax return being done is pretty much fraudulent” at a franchise in Los Angeles. Ogbazion did not revoke the franchise, but did sue it for royalties, the department said. According to the Justice Department, Ogbazion said he did not pay attention to customer complaints because, if he did, he “wouldn’t be able to sleep at night.”

Ogbazion’s business and personal phones are disconnected. At the one listed number that was answered a woman said he was no longer reachable there. Ogbazion also did not respond to messages to his work and home email addresses.

100 MILLION UNNECESSARY RETURNS

The Justice Department brings a high-profile tax case pretty much every year as the mid-April tax deadline approaches. But this misses the much bigger picture: More than 100 million unnecessary tax returns are filed each year, costing billions of dollars in software or preparation.

Meanwhile, the way Congress has written tax laws, and the way courts interpret them, makes it hard to pursue tax cheats. The average time for each criminal tax prosecution the Justice Department completed last year was 740 days, more than double the 345 days in 1992. Last year, the Justice Department completed only 3,656 criminal cases in which tax was the main charge, the analysis by Syracuse University’s Transactional Records Access Clearinghouse shows. No wonder the odds of a criminal tax indictment, while still minute, were 75 percent higher two decades ago.

The Justice Department relies on a law enforcement theory known as general deterrence. The strategy is to bring widely publicized cases to keep people in line. But the IRS criminal division website lists just 79 criminal cases in 2011. Figuring the others requires perusing 90 websites run by local U.S. Attorneys. Many convictions get little or no news coverage, which means zero general deterrence.

Canada, with a ninth of the U.S. population, listed all 204 tax convictions last year at the Canada Revenue Agency’s website. Claude St-Pierre, Canada’s director general for tax enforcement and disclosures, told me that posting all convictions is both a deterrence strategy and an effort to educate Canadians so they do not get lured into tax scams.

Congress should fund more prosecutions, many more, so the Justice Department does not have to reject 40 to 50 percent of criminal referrals by the IRS. Following Ottawa’s lead, the IRS should prominently post every criminal conviction and every request for a civil injunction (a much less expensive law enforcement strategy than prosecution) at its website.

The real solution, though, is to get rid of the archaic, frustrating make-work for 100 million taxpayers whose only benefit is profits for tax preparation firms.

I like the UK’s system, which as I understand it, implements the features you are recommending for the USA. Even so, our current (Conservative + Liberal Democrat) government is pursuing further simplifications – taking more people out of the tax system altogether by raising thresholds for income tax eligibility (raising tax-free income allowances), and by combining administration for tax and benefits. Life in the USA would be a lot easier for working Americans if American politicians and tax administrators would take a trip over here and see what has been done, and what is now being done; by the UK Government and by HMRC (the UK tax authority).

There’s actually a somewhat broader solution, also opposed by the H & R Blocks and Intuits of this world: The IRS should be authorized to set up a website that offers interactive tax return preparation. Any return that reflected information correctly and prepared via this website would be prima facie correct and there would be no penalties or interest charged if, for instance, the tax shown was incorrect, so long as the correct amount of tax is seasonably paid when the error is discovered.

BTW, I think that you missed one point: I believe that the paid tax prepayers got Congress to block any steps by the IRS to create such a website.

This idea really could work. The IRS may need some additional info such as single, married, head of household, number of dependents, etc…, but those could be easily be supplied on an expanded w4 which is required for employment anyway. So essentially this is the 1040-EZ automatically run maybe a week after the filing day, so if you didn’t file a longer return or an extension, it would kick in all by itself.

The majority of households that do itemize still have very simple returns that could also be automated to a large extent. The IRS could have an online filing site just for people with incomes limited to wages, retirement payments (annuities and Social Security), and simple earned interest, and deductions limited to childcare and mortgage interest. That would cover a majority of households (60-70%) since very few can meet the limts for other types of decuctions anyway. Other than childcare, the rest of this information is already supplied to the IRS. If childcare providers did the same than people could just pull up their profile, verify the numbers, and either make a payment for taxes due or supply a bank acount for deposit of their refund and tax preparation would take 15-20 minutes at most for them. Charge late filers within 30 days a set penalty added to taxes owed and give early filers (through the end of February) who owe taxes an early payment discount.

The other 25-30% or so who have more complex reporting for income, deductions, tax credits, etc… would just do what they do today.

While I cannot claim to be a professional historian, I am convinced that the more stable and sophisticated a political economy is and the more that society has become class dominated and institutionalizes differences in income, the more it must rely on “make work”. What exactly is truly necessary productive economic activity?

Agriculturally based economies with little industry seem to have the highest amounts of built in labor need. That could be called subsistence economic life. There is no absolute scale that can be applied to ideas like “standards of living”. It is always a matter of comparison and “keeping up with the Joneses”. War seems to be the test of a social order’s strength, and flexibility.

Highly developed economies seem to have the lowest percentage of their populations employed in agriculture and the highest percentage employed in crafts, industrial production, services and government. The more sophisticated the economy is, the more the government seems to grow. It is somehow unavoidable. It is productive but its products are abstractions. It becomes the brain while everything else in society becomes the muscle (but muscles with local brains).

Governments, whether monarchy or popularly elected, seem to be filled with people whose sole purpose is to think and govern and the environments they build for themselves are always characterized by opulence. Opulence is make-work. The lower down the social scale one goes, the more there is a match between need and consumption. (I must admit this is a homemade analysis and probably not even as good as Veblen and I don’t agree with him actually. He was a social theorists and not really what most consider a good economist.

That close match is what we call a low standard of living. The more an economy can create surplus labor, the more it tends to invest labor in opulence and luxury. Money systems have to keep as many people involved with money as possible or the society will drift back to subsistence living and the social order will fragment to local scale. Old world courts (not law courts, the other kind) were great magnets of money. They have to spend it to maintain influence and control over their society and they always have to be concerned with the over all welfare and satisfaction and even “happiness” of the society they govern or they don’t last long. They have to spend to get it. They seemed to have to come up with excuses to spend money and keep people employed. They were Keynesians by instinct. They were a number of other things by instinct too. And now that I have so little of it, I am convinced that money is actually a form of language and without it one cannot “speak” as effectively in life. A recent SC decision seems to cruelly confirm that.

If you want to get rid of make work at any level what do you replace it with? Government never seems to be efficient. It is always some kind of fudge factor in economies or any size or degree of sophistication. Courts could be filled with wealthy bodies that have no practical or productive function and yet they served as engines (or at least controllers of funding) of their economies. If they suck up money too heavily from the productive levels of the societies they govern, they create more problems then they solve. If they take up too little from the society, it starts to live without them (possibly to create expensive and unproductive conflict at the local level and they also loose the ability to deal effectively with other governments and societies.

I suppose Canada has the right idea but I haven’t paid taxes in a few years because my small business is dead now and I live on assistance from my father, a discount from the power company, fuel assistance and food stamps. I probably wouldn’t read the list without pangs of jealousy and even resentment. But a beggar can’t quire justify his complaint that the rich aren’t giving enough to him. Maybe the complaint becomes more justifiable if it becomes too obvious that somehow the circulatory system of the economy is breaking down and blood isn’t flowing to the extremities.

I used to attend a Catholic Church when I was a kid where the very cheeky pastor published the names of the parishioners with the amounts they had contributed. Not to be too naïve about this – but a list of the big payers would almost be a kind of status symbol.

A list of delinquents allows social and economic failures like me to gloat perhaps but doesn’t do anything to increase my own revenues. I’m in the position now of being like the “white trash” of the old south and yet I can look down on the black slave.

These 100 million taxpayers who don’t itemize deductions have one thing in common. 99.9% of them are due tax refunds because of the over-withholding. This cannot be eliminated without eliminating withholding entirely because the amounts withheld from paychecks are based on an estimate of annual taxes due with a finagle factor added to prevent under-withholding.

If they are due tax refunds, they will have to designate bank routing. That still requires a “filing”, even if shorter than the “short form”. If filed online by the 85-90% of people who pay bills online, then a lot of mailing is avoided, but that’s not new. Or, we could just go back to mailing 100 million checks.

Relying on the government to collect all pertinent data and establish how much you owe is not a good idea. Could you imagine the nightmare of trying resolve missing documentation. Or worse yet, they don’t have all the documentation send you a tax bill that isn’t right and then come after you years later for the shortage. Thank you very much, I’ll continue to provide all the documents and do my own taxes.

@ Ptiffany, te problem you cite is easily solved through adjustments to withholding or annual refunds, as other countries do and as many people do in another way if their property taxes and insurance are paid along with the mortgage.

@ xyz2055, despite your fears over countries do this and the California ReadyReturn system is a big hit with the few people who use it.

@ PseudoTurtle, most of my column is about eliminating unnecessary paperwork and saving money both in personal outlays and government spending

David, I wish you’d do an article describing how far higher top marginal rates would benefit capital intensive production over “capital lite” production. Not only is this encouraged by reinvestment of Gross Profits into deductible avenues like employee benefits, R&D, advertising, expansion and capital investment. Capital is particularly benefited thanks to the depreciation schedule. The higher the nominal rate, the greater the value of those depreciations.

So, low taxes actually encourage capital lite production, corporate exec profligacy, finance, lobbying, professional services, outsourcing and off-shoring are all encouraged by low taxes. I agree that we should simplify the tax code, but making it broader and lower is a mistake. Look at GE and GM, they’ve both run to finance since Reagan, raise those tax rates and they’d have invested in capital plants.

Low taxes make it profitable to liquidate capital plants, whereas, high taxes make it untenable, and even places a premium on domestic expenditures.

I agree with the above, I even posted this to the White house website and I am in agreement with the odds of this not happening as our congress is pretty much useless.

Even though I itemize my deductions, I still don’t have anything that the IRS does not know about, all forms 1099s to the different schedules are already sent by the banks to the IRS. So, all the IRS has to do is give us a choice, ask during the beginning of the year if I need my tax return be prepared by IRS and if I agree then they should do it. These days, as the Software has become so advanced that IRS may not have to spend much man power to prepare simple tax returns such as mine!!
Keep buying Intuit’s stock I guess.

Bravo, and I’ve just posted a link to this on GenevaLunch.com, Swiss news in English site, because the gross complexity of the US tax filing system is a nightmare for Americans abroad – in particular the very large number who don’t owe any tax to the US because they are already paying another government, who have nothing but wages and retirement income to report and who have no alternative but to pay tax preparers fees that are far higher than what HR Block or other corner shops charge. I think our readers will be very interested in what you have to say.

I think it’s worth noting that having spent years as a US taxpayer, I was astonished to learn how quick and easy the Swiss tax filing system is for citizens and residents here, with the result that there is little fraud or abuse. Despite a steady stream of US headlines about Switzerland and tax cheats (wealthy Americans who don’t live in Switzerland), the Swiss have a very good record for tax compliance, which has a lot to do with the government making it easy to file. The federal government here doesn’t need an army of tax collectors to hunt down abusers of the system.

I can file my family’s taxes, including those for a handicapped adult who receives a government pension, in an hour.

I read one of Luntz’s books about a year ago. That is, I forced myself to read it until the end. My conclusion is that he is a delusional, highly-biased, irrational, and illogical thinker. The book was one totally irrational conclusion based on little, no, or highly-selected facts after another. How people like Luntz can sell books is a bad reflection on the people who buy the books. Admittedly, I was one of those people, but it was only to see if the title delivered on what it said it would deliver. It did not. Not at all. I will not buy another.

@paintcan your reply merits being post in itself. 2% of our population produces all our food. We must trade something to get in on that. The New Economics Foundation proposes eloquently a 21 hour work week. With culture, we, like the Athenians could develop truly fine arts, objects, tools and pottery, but we might have to reconsider trading quantity our current maxi-miser in for quality. We could make an trade art objects on our own time.

The magic of our mutual multiplication of wealth as we traded our skills was made physical when the ‘middle class’ was an economic, not a political term, when we could trade with each other. Now, as a stratified economy, we can not even have equal protection under the law, when Joe makes $40k and Jamie make $40 million.

Back to taxes…. It is near religion for some to avoid taxes; a game for accountants and lawyers who are the anointed priests in their black suits. A grim, immoral religion that avoids the simple dictum of allowing those who benefit most from society pay in proportion to the benefit. Good thinking in two ways: A) they can, and B) it is moral.

Unpopular as Hermann Daly’s dictum has been for the last 40 years: ‘Tax Bads, not Goods’, it is still a wise vision. Tax what we do not want. Tax what harms us. Oh but this would take a rational and deliberative legislature. What was I thinking?

In our society we seem to have exchanged money for honor. And through slight of hand made it impolite to talk about money; who gets how much, who dodges their share. Thus… there is no honor. That is a problem. For without that, there is only gaining idea and decay. The book, Debt, the First 5,000 Years brings this into vivid relief.

The transactional friction that comes with tax preparation certainly creates an “artificial” economy within the tax compliance industry, but I have a hard time believing that this is what has kept the income tax reporting requirements in effect. I tend to believe that the U.S. government rather likes the idea of the mandatory reporting of so much sensitive information, both because it allows a special window into what people are up to, and because it keeps the citizenry just a little bit trained in being subservient. What a crime though to make so many people suffer so much angst over the filing of income taxes if the real goal is to simply collect a little revenue.

“We don’t trust amateurs to inspect elevators or audit charities, so why do we let just anyone charge for preparing tax returns?”
The difference is that everyone is obligated to pay income tax, therefore it is unjust to make it too complicated for most folks to understand. Also, as documented by Sudhir Venkatesh in “Off the Books: The Underground Economy of the Urban Poor,” many poor people earn a small income by preparing income tax returns for their friends and neighbors.

@TheOldSodbuster: As a single-taxer, I have long supported elimination of all taxes except on land rent and privilege. “Tax bads, not goods” is a good start.

When a taxpayer in one of these states files an income tax return the money that comes to them as a return is coming from the state treasury, right? If the taxes never made it to the state but are sitting in a company’s bank account are those returns now an additional deficit to the state’s treasury or is the company charged for the return?